Q & A

In his Budget statement, the Minister for Finance said inter alia: "I also propose to make adjustments to the health and employment and training levies. The levies apply at a combined rate of 2.25 per cent on income over £10,750 (13,649.68) per annum."

I am an old age pensioner with a pension of £13,000 odd per annum, from Friends First and it deducts 2.25 per cent each month from my gross pension in respect of these levies. My question is whether there is a confusion between the Revenue and the Minister as his words seem to indicate that the levies should be based only on income above £10,750?

Mr R.J.S., email

Although at first sight it might appear that you have a case for paying lower tax in respect of levies and indeed claiming a refund, this is not the case. The confusion appears to arise in the words used by the Minister in his Budget speech. When he said the levies were payable at a combined rate of 2.25 per cent on income over £10,750, he, in fact, meant that the levies were payable at the set rate on those incomes which exceeded that amount - i.e. on all of the income where that income was in excess of £10,750 per annum. In your case, with a pension income of around £13,000, that would leave you liable.

It should be mentioned that the changes announced by the Minister for Finance in the Budget in early December removed one of the levies while raising the rate applicable to the other. The employment and training levy, which applied at a rate of 1 per cent, will disappear from April 6th of this year. At the same time, the health levy will rise from 1.25 per cent to 2 per cent. In addition, the threshold below which the levies are not payable will rise from £10,750 to £11,250 a year or £217 a week. While the cut in the rate of the overall levy will benefit, Mr R.J.S. to some degree, the rise in the threshold is not sufficient to remove him from the levy tax net.

Pension benefits

In a recent article on pensions in The Irish Times, it was stated that most defined benefit schemes paid two-thirds or at least half of final salary by way of pension. My own occupational pension scheme is as follows. The basic pay, not including shift or overtime payments, less 1 1/2 times the single person's old age pension, divided by 60 and then multiplied by the number of years service up to a maximum of 40. This would leave me with a pension of less than one-third of income based on my average earnings every year. Is this a typical company scheme and what can be done to improve it? I contribute £12 a week. I earn £22,500 minimum and work in the pharmaceuticals sector.

Mr E.D., email

Okay, let's start at the beginning. What you are saying is that you do indeed have a defined benefit pension scheme which pays two-thirds (40/60ths) of final salary by way of pension. This is a contributory scheme. The problem is in the conditions attaching to which sources of income are included for pension purposes and also in the deduction of social welfare entitlements from the final sum payable.

Looking first at the second issue, it is not unusual for occupational pension schemes to reduce their exposure by paying the declared benefits - in this case two-thirds of basic salary - less the sum of the old-age contributory pension. What is slightly unusual in this case is that your scheme is deducting 1 1/2 times the single person's social welfare old-age pension. Quite frankly, I cannot see the logic of this in that you can only claim an old age pension in respect of yourself and, therefore, would appear to be automatically out of pocket. Whether it is predicated on the basis of only one spouse working, I cannot say without seeing the full details of the scheme. If it were, it would assume that the retiring employee would be able to claim £52.50 a week (£55.50 from June 1999) for his or her spouse as a qualifying dependant adult in addition to the £83.00 a week (£89.00 from June 1999). Of course, this is based on the assumption that the spouse does not have an income of more than £60 a week, and is not in receipt of a social welfare payment in his or her own right. That is no good in cases where both spouses work and therefore have individual entitlements to a full contributory old-age pension, in cases where the retiring employee is single and, indeed, in cases where such an employee is widowed. In these cases, not such unusual scenarios, the employee is essentially being penalised.

Returning to the question of basic salary, the Revenue Commissioners' rules are quite simple on the limits applying to defined benefit occupational pension schemes. These state that employees can receive a maximum of two-thirds of final remuneration after 10 years service. Your problem appears to be that your company scheme has a very strict interpretation of the remuneration it will allow for pension purposes - basic salary only.

Under Revenue rules there are several ways of calculating final remuneration for pension purposes. It could allow the rate of basic pay on retirement or on any date in the year up to that date in addition to the average of "fluctuating emoluments" over three or more consecutive years up to retirement. That latter provision gives plenty of scope for allowing regular shift or overtime payments - especially in a situation like yours where these appear to constitute a considerable portion of salary.

However, it is up to each pension scheme to define the benefits it will permit. Obviously, the greater the benefits, the higher the cost, both to the employer and the employee, unless one is in a non-contributory occupational scheme. Normally, in contributory pensions, the employee portion of the pension payments is around 5 per cent, although this obviously differs from scheme to scheme. On the basis of the figures you have given me, it appears that the employee contribution in your case is just above 2.75 per cent. That might go some way to explaining the limited nature of the benefits available.

Turning to what options are open to you, they realistically amount to two. Either you can seek to persuade the trustees of your scheme to alter the benefits available - bearing in mind that any such changes will probably involve a cost to you as well as the company - or you can pay what are known as additional voluntary contributions (AVCs).

AVCs essentially allow you to top up your pension in various respects in those situations where the company pension does not pay the maximum allowed under Revenue Commissioner limits. The AVCs can be paid either into the company scheme or separately. The former is normally the better option in that the costs involved in paying additional amounts into an existing company scheme are generally far lower than those involved in setting up a standalone scheme. The employee can receive full tax relief on up to 15 per cent of gross salary paid into a pension and AVCs, making it a very accessible method of reducing income tax liability. In a case where you appear to pay less than 3 per cent of basic salary into your pension and where your total remuneration far exceeds your basic pay, you would appear to have plenty of scope for paying into AVCs.

There are a couple of points to note. First, the extra benefits one buys under AVCs must not bring the overall benefits payable over the limits laid down by the Revenue; second, while 15 per cent of gross salary can be paid into your pension and secure full tax relief, that amount cannot exceed five times the contribution of one's employer; third, you need your employer's permission to set up such a scheme, either as part of the company's own pension fund or separately; fourth and finally, AVC contributions are treated in the same way as other pension contributions and are not generally refundable unless one leaves employment and then only in certain circumstances.

As to what you can purchase with such AVCs, they can be used to buy a range of benefits. The first aim for many people is to ensure that the basic pension payable on retirement is two-thirds of final remuneration to ensure that no sharp income shock ensues. Beyond that, one can ensure index linking of a pension if not already provided for or make provision for a spouse's pension should the pensioner pre-decease the spouse.

In cases such as yours, the AVCs could be used to make up the shortfall arising from the social welfare pensions provisions of your scheme or for non-salary elements of your remuneration such as bonuses, company car and the like which are not included in the individual company scheme. It might, alternatively, allow you to retire early on a full pension or pay for death-in-service benefits if these are not already provided for.

In any case, pension provision is something no one can afford to ignore and a worthwhile new year's resolution would be to examine one's current pension provision and see how it might be improved. Professional advice might not go amiss.